Go For The Gold!
Perhaps you’ve planned it from the beginning, or maybe you’ve taken years to decide. Somewhere down the line will come the time to sell your business, and you want to make sure you come out on top.
“I sold my business” is a magical phrase for entrepreneurs. It conjures up of pictures of wealth, leisure and exciting new challenges. For many entrepreneurs, it’s the goal from day one.
“Selling might not be everyone’s objective when they’re starting out, but it should be” says Ned Minor. Mr. Minor is a transaction attorney in Denver, and the author of “Deciding to Sell Your Business: The Key to Wealth and Freedom.” It seems eventually, every business owner leaves their business either sitting down at a deal table or feet first on a stretcher.
The idea of working until your last breath is not uppermost in our minds when we start out on that exciting roller coaster ride known as “entrepreneurship.” But if you aren’t already planning a more graceful exit, you may come out on the short end of the stick.
When starting a business we’re usually so busy with the details involved in making it an eventual success that selling out is the furthest thing from our minds. But the day you start building should be the day you should start designing your exit. It should be the ultimate goal of your success.
Many entrepreneurs are successive business builders. The fact that they sell one business doesn’t mean retirement for them, it just means the opportunity to start another business that has been lurking in the back of their minds. In fact many entrepreneurs enjoy the building up of a business almost more than the profitable success it becomes.
What does a saleable business look like? It’s saleable if it’s “scalable” says Minor. There are small-and-steady businesses sold every day, but the big bucks come looking for a business that has huge growth potential. Every buyer thinks that he/she is smarter than the seller, and that they can double or triple the present business it’s doing. A business will fetch the best price only when buyers believe they can take advantage of significant future growth potential.
Selling a company’s future upside however, means proving your previous growth and validating your future growth strategy. You should start with 2 years of audited financials to backup the historical growth. Then be prepared to explain your business strategy and how it fits into the overall market. Be it through acquisitions that you’ve grown, then show how many more acquisition targets are still in the market. If through new product development, be prepared to give the details of your R&D pipeline and your ideas for future products.
Now as for buyers, there are two types. There are “financial buyers” who will typically pay a lower price because they have a fire-sale mentality. You need to find the strategic buyers out there, and paint a picture for them. Show them a great customer relationship, a great piece of intellectual property, an advantage in time to market, or a key employee. Show the strategic buyer how one plus one equals three.
Then again, why settle for just one buyer when you could have two? Having another buyer in the wings is a vital strategy in the sale process. Having a strong and visible alternative makes any acquirer sit up and take notice. There needs to be tension to the deal. Each side wants the other to think that they’re about to walk away; it’s the tension that gets the deal closed.
The best buyers are large, high-flying public companies with broad, strategic agendas and cash to spare. Selling to a public company also has other advantages and tangible benefits. Many transactions leave the seller with a fistful of stock, or worse, a long-term payout. A publicly traded acquirer makes an eventual cash payout more assured. Be sure to make your business sale more than a sale of your personal network and capabilities. Make it look like it’s worth the asking price, especially if you’re planning to leave after the sale.
Build a strong management team that can carry on when you’re gone. A team with clear policies and procedures, and a broad customer base which are the underpinnings of value. Your business should not just run without you, but be positioned to grow without you. Make sure your key employees are given incentives to stay on after you go, and make sure you communicate with them during negotiations. It’s crucial to minimize disruption.
The sale of a business is complex. If you’ve been in business for 10 years, then it has 10 years of potential liabilities, lawsuits, and bad accounting. Buyers want to know exactly where the business stands, so extreme diligence and complete disclosure on your part is essential. Sometimes what the buyer requests during negotiations is mind-boggling and you should hire some outside help to put it all together.
Getting the deal closed takes the talents of several people, and here’s a list of who you’re likely to meet on your way to closing.
On the Buyer’s Side:
- CEO: The chief executive needs a vision of how the new company will fit into the existing organization.
- CFO: This is the detail person, and a professional skeptic. In the long-term view, he/she will take the heat if reality doesn’t live up to expectations.
- CPA: The buyer’s CPA (or accounting firm) will validate the seller’s numbers. Don’t be surprised if the CPA doesn’t argue for a lower purchase price based on historical profits. These are the “bean counters” of the deal.
On The Seller’s Side:
- Investment Banker: He/she is a professional “quarterback” keeping both teams moving toward the goal. He keeps one eye on the sale price, and the other on the strategic best interests of the business owner.
- Transaction Attorney: He’s the referee – there to make sure no one gets hurt. The transaction attorney’s focus is the sale contract, but he/she can also handle communication with the buyer.
- CPA: The seller’s CPA should be advising the seller on the personal tax consequences of the deal, and how to handle the after-tax proceeds.
And you thought it was going to be easier to sell it than to start it, didn’t you? Remember, no deal is a sure thing until it’s done! Perhaps the only sure thing is that selling a business is never simple. It can be the most harrowing, and the most rewarding experience in the life of an entrepreneur. Take it slowly, with planning, strategy and guidance. Each step of the process can add value to the company, and get you closer to the finish line.